As Rishi Sunak announces that the government will pay the wages of hundreds of thousands of young adults for 25 hours a week over six months, it’s worth remembering that this will be on a minimum wage more than a quarter higher than it was five years ago.
A full-time worker aged 21 now earns a minimum of £16,000 a year, up from £12,700 in 2015. Five years ago to the day, George Osborne, presiding over a healthier economy, announced from the same dispatch box a dramatic reversal of the Tories’ caution about minimum-wage rates. His national living wage for over-25s, initially set at £7.20 and now at £8.72, has been accompanied by steep increases in the minimum wage for younger workers.
But two key issues will be important in the months and years ahead to avoid a situation where efforts to avoid mass long-term unemployment lead to a further increase in working poverty, which has grown alarmingly despite increases in the minimum and living wage.
The first is to see through the government’s plan to “end low pay”, involving an extension of the national living wage to younger groups – those under 25 are only eligible for the (lower) minimum wage. Ending low pay will require a determined focus on achieving Sunak’s ambition of creating “good-quality” jobs, by making sure they are well paid and secure.
The second is to abandon once and for all the idea that minimum wage increases allow swingeing cuts in tax credit and universal credit top-ups to low-income working families. This was Osborne’s plan in 2015 – more pay, less working “welfare” – but it was always flawed. The problem is that better minimum wages produce relatively modest income gains, which don’t reach families with slightly better hourly pay but low earnings due to part-time hours. Any gains can be outweighed by even a modest percentage cut in the tax credits on which families depend.
Five dark years
I pointed this out in The Conversation the day after the original announcement, and enough backbench Tories agreed with me to cause Osborne to cancel his immediate cuts to tax credits, which would have withdrawn them more sharply from workers as their earnings rose. Yet he stuck with the freezes in benefits, tax credit rates and universal credit, which have continued to undermine the value of working incomes.
The impact on struggling working families put paid to Theresa May’s mantra of helping the “just about managing”. So Anneliese Dodds, the shadow chancellor, was understandably sceptical about Rishi Sunak’s declaration in the summer statement that he is “helping the poorest most”. At the very least, he will need to demonstrate this with actions not words.
So far, there has been a start of a retreat from austerity in benefits policy. This year, not only have the freezes on benefits ended, but working tax credit and universal credit rates have risen (temporarily) by £1,000 a year more than inflation, in response to the coronavirus crisis. Coinciding with the 6% increase in the national living wage to £8.72, this has raised the net income for a family with parents working on low pay considerably – as long as they maintain their previous working hours (of which more later).
So where does this leave working incomes relative to family needs?
My team at Loughborough University has just launched the 2020 results of our minimum income standard (MIS), which calculates to what extent benefits and wages are keeping families out of poverty. This year’s data incorporates fresh research on what members of the public people say is required for an acceptable standard of living.
While we have not yet been able to incorporate in this research the new patterns of living seen since lockdown (which are in any case changing by the day), our results reflect how important it is for households to be able to afford to access current technologies supporting their everyday lives, both for practical tasks and for social participation. The dawning of the age of Zoom, with remote working, remote schooling and remote socialising, has hugely reinforced these findings.
But another feature of our findings relates directly to the policy challenges of supporting working incomes in order to allow families to have decent lives. The minimum income standard allows us to track whether people on minimum wages have enough to make ends meet.
Designing a post-austerity world
In 2008, when we started this research, tax credits got families almost to the MIS level, but by 2019, even helped by higher pay, they were falling well short. For example, a lone parent working full time to support two children had more than 20% less disposable income than they needed.
In 2020, for the first time in over a decade, state support for working families and minimum hourly pay are rising simultaneously. This has boosted working incomes so that it is now possible for the first time for a dual-earner family, with a full-time and a part-time working parent, to have disposable income around the minimum level with the help of universal credit. Lone parents still fall short, but by only 8% if they work full time and get universal credit.
Of course, this does not mean that families are thriving. Limited working hours often play a greater role in producing low household income than low rates of hourly pay, and many families are now out of work, or on shorter hours than six months ago. Nevertheless, Rishi Sunak has demonstrated something that George Osborne never accepted: increases in state help can complement decent wages in raising the prospects of families with low earnings.
People like the footballer Marcus Rashford have helped shine a spotlight on the struggle faced by those on low incomes, and not just during the time of COVID-19. This has highlighted the case for improved support for such families, on a permanent not just a temporary basis.
In the months and years ahead, as Britain works to reduce its suddenly high rates of unemployment and underemployment, a renewed commitment to paying adequate benefits to people whose incomes are falling short could become one of the benign legacies of 2020.
Donald Hirsch receives funding from the Joseph Rowntree Foundation, is a member of the Labour Party and co-author of The Living Wage from Agenda Publishing.